In this thread I will post responses to random comments by Jens Weidmann translated into English.

Weidmann:

"However, it is essential to keep monetary policy and fiscal policy strictly segregated and, in particular, to stringently observe the prohibition on the monetary financing of governments. Neither providing life support to ailing banks nor propping up the solvency of sovereigns falls under the remit of monetary policy. Decisions relating to the redistribution of major solvency risks of banks or governments among taxpayers across the euro area is the sole responsibility of elected governments and parliaments. Admittedly, it is not always possible to clearly differentiate between liquidity shortages and solvency risks of banks and, precisely in times of crisis, a certain degree of flexibility is appropriate for a short time. However, this can also inflate risks on central banks’ balance sheets, and moral hazard may assume a critical dimension."

Moral hazard is the tendency of certain parties to take risks because the cost of the risk is not fully felt by that party. While it is certainly important to avoid moral hazard, it not clear that by refusing to support systemic banking stability, central banks are in fact protecting themselves. When central banks have large claims on the private banking system, a collapse in the private banking system would necessitate massive write-offs of central bank balance sheets even if it might address the moral hazard problem. Further, it is not at all true that EZ banks at the present time are relatively speaking, taking great risks and making great loans. Currently they are in defense mode. The time when EZ private banking credit expanded the most quickly was before the crisis broke out. That was the time when moral hazard would have been best addressed-- during the boom. Moral hazard is best addressed by regulation, not by a refusal to support systemic banking stability, or economic growth.

Secondly, yes, in the ideal situation elected parliaments and governments should address all redistributional questions in the EZ. However, in this case it is simply not possible. What if, the majority of the European voters under the EZ voted over whether the ECB should purchase bonds? In Italy there is 60 million, in Spain 40 million, in the other PIIGS 40 million, for a total of 140 million out of a total EZ population of 320 million. It seems clear that the majority of these voters would support bond purchases. Indeed, all of the elected politicians in these countries support bond purchases. The tiebreaker is France, which recently elected a President (Hollande) who supports bond purchases. In other words, it is very possible that, if given the option to vote, the voters of Europe would support bond purchases over impossible austerity.

The real issue here is not elected parliaments and governments per se, but the continued lack of political unity within the EZ. The EZ leaders set up a series of institutions under a fundamental misunderstanding of the meaning of monetary union, a lack of understanding of epic and astonishing proportions- namely, that all monetary unions require a fully functioning central bank, that can serve as a lender of last resort, first and foremost to sovereigns. They thought they entered into a monetary unions but they didn't have the infrastructure to support it. This was due to a fundamentaly misunderstanding on the part of Germany and others of what constitutes a monetary union.

In my opinion, the failure here is on the part of the elites and the German fear of inflation is frankly misplaced. Germany would lose far more from the default of the South than it would from a bit of inflation. In fact, Germany would benefit from inflation because the wages of German workers are too low and need to go up. In the status quo, German workers are being highly productive and yet they were not being properly compensated. If on the other hand, Germany wants to leave the euro, it should simply do so and not precipitate a crisis to force out others who want to stay in.

Weidmann:

"It is true that consolidation, in particular, might, under normal circumstances, dampen aggregate demand and economic growth. But the question is: are these normal circumstances? It is quite obvious that everybody sees public debt as a major threat. The markets do, politicians do, and people on Main Street do.

A widespread lack of trust in public finances weighs heavily on growth: there is uncertainty regarding potential future tax increases, while funding costs are rising for private and public creditors alike. In such a situation, consolidation might inspire confidence and actually help the economy to grow."

This part is simply insane. When sovereigns are facing a liquidity crisis, the problem is not the government's ongoing behavior (deficits) but the need to refinance past debt. Thus governments not only need to balance their budget, but to run large primary surpluses to pay off past debt as it comes due. However, there is also a fiscal feedback loop, that when the government runs a large surplus during a deleveraging cycle, it plunges the economy into a deep recession. This in turn deprives the government of revenues, thus requiring an even larger adjustment. This in turn deprives the creditors of confidence that the larger adjustment will be able to be made, and we begin all over again. This downward cycle continues until the entire economy is in shambles, and was the lesson of the Great Depression. Being played out again. Mr. Weidmann is wrong.

« Last Edit: August 02, 2012, 07:44:06 pm by Beet »

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A New Chapter"I feel like Paulette Revere — the recession is coming, the recession is coming!” - Hillary Clinton, April 3, 2008

Ok this isn't a response to Jens Weidmann (directly) but is hilarious (it comes from Edward Hugh's facebook page):

"Well I've just watched the Monti/Rajoy press conference. To some extent they seemed to be almost consciously engaged in carrying though an exercise in self parody, testing at one and the same time the patience of both the markets and the assembled journalists. I have to give Mario Monti credit though, he was sporting an almost immaculately sculpted haircut, which fortunately took my attention away from all those long carefully-crafted but empty phrases he was coming out with.

On the other hand, Mr Rajoy, well how can I put it? Look, up here on the Costa Brava we have a wind called the Tramuntana. It can blow at speeds of 70 Km, 80 Km, 100 Km per hour and more. Many of you will recently seen it at work to devastating effect in the forest fires. Well, refusing to answer each and every question put to him fromSpanish journalists about the real world we live in, he insisted on reading from a preperpared text which was mainly composed of extracts from Mario Draghi's press statement, with which he seemed to find highly encouraging. He thus seemed intent on conveying to those present (and those watching) that he had more important matters on his mind than their trivial questions about "rescues" etc. What he seemed to be saying was that his one and only obsession at this moment in time is to come up here and try pissing into our local wind, just to satisfy his personal curiousity about how long he can do so while continuing to keep his trousers dry. When he is done with that problem he make the time for other matters and in all probability will call for a rescue.

10 year yields at 7.24% and rising. How long before we break the 8% threshold? Ask Mariano how long he needs before he is done."

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A New Chapter"I feel like Paulette Revere — the recession is coming, the recession is coming!” - Hillary Clinton, April 3, 2008

More for Weidmann to ponder (this from the apparently prophetic Jan Kregel in 1998. Holy batman.)

"Germany appears to have adopted a policy of controlling the growth of nominal wages at a rate that is below its domestic productivity growth. German unit labor costs have been falling …. If Germany does in fact manage, as it seems to have been doing for about two years, to continue to decrease its unit labor costs at 5 percent — that is, at rates that are substantially below those in the other European countries, with no longer a possibility, as has been the case in the past, for the deutschemark to revalue relative to the other currencies — this means that if I am a manufacturer or a government in a non-German European country, I am going to experience declining profit margins until I also manage to compress my unit labor costs.” (This is from a presentation Jan made at an early MMT conference organized in London by Warren Mosler, and published in The Launching of the Euro, Proceedings of “A Conference on the European Economic and Monetary Union,” Annandale-on-Hudson, N.Y.: The Bard Center, 1999)"

“If France or Italy decided to expand domestic demand, it would be quickly drained out of the country—it would no longer show up in the German balance of payments surplus and an Italian deficit as before EMU, but now appear as increased expenditure flows from Italy to Germany, with the Italian fiscal deficit deteriorating, and credit risks on Italian securities increasing. While both labor and capital costs will be rising in Italy relative to Germany, this will only exacerbate the divergences and make a policy of downward wage convergence more pressing. The single currency will bring the positive benefit of releasing European economies from having to contract their domestic expenditure policies to defend their exchange rates relative to the DM, but it brings with it the cost of requiring that they contract their nominal wages to defend the competitiveness of their domestic production against cheapening German imported goods.”